The outcome of a struggle for preferred shareholder votes will determine whether the Bermuda-based target can fend off its hostile suitor and complete a merger with Axis Capital.

NEW YORK (The Deal) -- The showdown between Exor SpA, of Turin, Italy, and its hostile target PartnerRe (PRE) is coming down to the vote of the PartnerRe preferred shareholders.

Exor is pushing its unsolicited $137.50 per share, $6.5 billion, bid for Bermuda-based PartnerRe that would break up PartnerRe's cash and stock merger with Axis Capital Holdings (AXS).

PartnerRe shares traded Tuesday for $130.02 at a spread of $7.48, or 5.7%, to the Exor offer. The reinsurance company's shares traded at a premium of $3.90 to the $127.52 value of the Axis transaction, which is for stock and a $11.50 special dividend for PartnerRe shareholders. As such, PartnerRe shares are trading at a steep spread to the spoiler bid but also well over the value of the Axis deal.

PartnerRe has claimed that the merger of equals with Axis provides its shareholders with a diversified insurance platform and upside potential since the deal involves an equity participation in the larger combined company. The Axis deal has competition regulatory approvals but remains subject to insurance regulators' approvals and the vote of both companies' shareholders. PartnerRe's shareholders will vote July 24.

Exor says it is offering greater value in cash and it has the financial institution management background to get its deal done. The companies are not in material negotiations.

Under Bermuda law, the Axis merger requires 50% approval of both common and preferred shareholders voting as a single class. The PartnerRe preferred represent about 40% of that vote, so the marketing for each deal has been focusing on the preferred holders. PartnerRe and Exor are now in a battle over the preferred vote, since the common is likely to favor the Exor offer. While PartnerRe common shareholders would be taken out with the Exor transaction, the preferred would remain outstanding.

With a spread of $3.90 to the value of the common in the Exor transaction, the common vote would seem to be sewn up.

Exor has said it will not increase its offer further, but it has not formally called it the best and final. It has also called the Axis deal riskier because Axis could terminate if PartnerRE suffers significant losses during the ensuing hurricane season and its A.M. Best rating dropped below A-. This year's hurricane season is expected to be relatively mild, however.

PartnerRe reaffirmed its recommendation of the Axis deal and said it urges preferred shareholders to vote for that deal, which offers diversified earnings, lower volatility and an enhanced business profile. The Exor deal would incur significant leverage, which could lower the credit rating of an Exor-controlled PartnerRe and hurt the rating on the preferred, PartnerRe said. The company also cautioned that under Exor, the closely held Italian entity would control the vote on any significant corporate actions, which could also affect the value of the preferred shares.

Exor is arguing that the Axis transaction raises leverage for the combined company and includes a capital distribution in the special dividend, both of which harm the preferred shareholders.